Contrary to popular opinion that rising interest rates will be bullish for banks, analyst Dick Bove told CNBC on Friday the opposite is true.
“What if you have $3.5 trillion worth of bonds and you increase interest rates — what happens to the value of that $3.5 trillion? It goes down. It takes the common equity of the banking industry down. It reduces the secular growth rate of the industry,” the vice president of equity research at Rafferty Capital Markets said in an interview with “Closing Bell.“
“It is not good for banks to see interest rates go up even though you get an improvement in net interest margins and net interest income,” he added.
The Federal Reserve has slowly begun raising rates, with the last increase coming in March. The central bank has indicated it expects three moves this year.
Bank stocks got a lift after President Donald Trump‘s victory in November, but the run up appears to have stalled.
The SPDR S&P Bank exchange-traded fund (KBE), which rose 26 percent in the month following the election, has lost about 2.5 percent year to date. Meanwhile, the KRE, an ETF that tracks regional banks, rose 27 percent in the month following the election, but has fallen more than 3 percent so far this year.
Bove thinks the sector will continue to decline, at least over the next several months. That’s because, he said, there has been a deceleration in loan growth.
“We’re really looking at a significant increase in loan losses in virtually every consumer category, in some commercial categories and in construction loans,” he said.
“Even though people are ecstatic about what might happen if interest rates go up and net interest margins get better, the bottom line is these companies are in businesses and the businesses are not doing well.”
Making predictions further down the road is difficult, however, since it is unknown what will happen with tax cuts and other parts of Trump’s agenda, Bove added.
— CNBC’s Rebecca Ungarino contributed to this report.